By now, many investors have been regaled with tales — all accurate — of the doom and gloom that has set in for biotech stocks and exchange-traded funds.
Over the past month, five of the worst-performing ETFs are biotech ETFs and two of the other seven offenders are health care funds that are heavy on biotech stocks.
That sounds bad — and it is — but a few things must be remembered about biotech ETFs, not the least of which is the fact that these are some of the best-performing over the past several years. Over the four-year period ranging from 2011 to 2014, the number of health care ETFs appearing among each year’s top 10 sector ETFs was three, three, three and five, and most of those in each year were biotech ETFs, according to Dorsey Wright data.
Even with the recent struggles encountered by biotech stocks, investors have remained devoted to biotech ETFs. During the third quarter, the iShares Nasdaq Biotechnology ETF (IBB), the First Trust NYSE Arca Biotechnology Index Fund (FBT) and the SPDR S&P Biotech ETF (XBI), the three largest biotech ETFs by assets, hauled in over $1 billion in new assets combined, according to ETF.com data.
At over $1 billion, those inflows say professional investors are using the dip to get involved with biotech ETFs. Do-it-yourself investors might want to consider following suit and doing so with some unheralded biotech ETFs in addition to the aforementioned prosaic offerings.
A good place to start could be:
ALPS Medical Breakthroughs ETF (SBIO)
Expenses: 0.5%, or $50 for every $10,000 invested
At the outset, we noted that biotech ETFs have struggled over the past month, and the ALPS Medical Breakthroughs ETF (SBIO) has been one of the most egregious offenders, tumbling 18% over the past 30 days. If the potential for a silver lining exists here, it is that laggards can turn to leaders quickly in volatile sectors such as biotech.
The primary reason SBIO has been beaten down lately is its emphasis on smaller biotech stocks. SBIO’s approximately 80 holdings can range in market value from $200 million to $5 billion, but no higher. As recent history shows, when biotech stocks fall, smaller names usually endure the brunt of the punishment.
SBIO puts an emphasis on companies that have one or more drugs in either Phase II or Phase III U.S. FDA clinical trials. Translation: This is an ETF that can keep investors from playing the FDA guessing game while still leveraging those investors to positive clinical trials data.
Top holdings in SBIO include Seattle Genetics (SGEN) and Anacor Pharmaceuticals (ANAC).
While this biotech ETF might strike novice investors as a niche play, there is no denying SBIO is a successful biotech ETF. SBIO is less than 10 months old and already has more than $145 million in assets under management, according to issuer data.
BioShares Biotechnology Products Fund (BBP)
Expenses: 0.85%
The BioShares Biotechnology Products Fund (BBP), like the aforementioned SBIO, is a highly focused biotech ETF.
This biotech ETF follows the LifeSci Biotechnology Products Index, a benchmark “designed to measure the equity market performance of the common stock of U.S. exchange-listed biotechnology companies with a primary product offering or product candidate that has received U.S. Food and Drug Administration approval,” according to BioShares.
That is an appealing methodology … when biotech stocks are working. But that has not been the case in recent weeks.
Adding to that, BBP faces the same problem afflicting SBIO: Heavy exposure to smaller biotech stocks. The median market value of the stocks featured in BBP’s underlying index is just $3 billion, according to issuer data.
As of the end of the third quarter, BBP’s index was home to 38 stocks, including Aegerion Pharmaceuticals (AEGR), Keryx Biopharmaceuticals (KERX) and Orexigen Therapeutics (OREX).
BBP is an equal-weight biotech ETF, which helps diminish single-stock risk, but that does not mean investors miss out on positive FDA news or mergers and acquisitions headlines. Even with its recent struggles, BBP is up 8.6% year-to-date and through the first six months of the year, this biotech ETF surged 32.5%.
As of this writing, Todd Shriber did not own any of the aforementioned securities.
